London, 31 January 2002 – Moody’s Investors Service has today assigned an A2 long-term issuer rating to the new holding company of the National Grid Group.
At the same time, the rating agency has changed the outlook for the ratings of National Grid Group plc, New NGG and The National Grid Company plc to negative from stable.
The outlook change reflects the reduced financial flexibility of the group at the current rating level due to the combination of a sustained reduction in the equity value of the group’s remaining stake in Energis and some uncertainty whether possible funding commitments of the group could be greater than initially anticipated, Moody’s said.
The trigger for any rating action or for reverting the outlook back to stable would be greater clarity surrounding the situation at Energis and the RTO investment requirements.
Establishment of new ngg has no material effects for bondholders
In order to effect the acquisition of Niagara Mohawk (NIMO), the company will establish New National Grid Group as the new holding company of the group. This will involve moving the ownership of the US chain of companies to the new company.
Old NGG will become an intermediate holding company for all non-US activities of the group. New NGG will become the listed company and will be renamed National Grid Group plc, whereas Old NGG will be delisted and renamed National Grid Holdings One plc. New NGG will issue a Special Share through which the Government has the ability to block any take-over of NGG.
The establishment of New NGG will not have any material effects for bondholders. The guarantee from Old NGG for the EUR2 billion Eurobonds issued by NGG Finance will remain and will be supplemented by a joint and several guarantee from New NGG. The GBP243 million convertible bond (“EPIC”) will remain at Old NGG.
Moody’s concluded that retaining the EPIC bond at Old NGG does not give rise to any concerns of additional structural subordination for bondholders of New NGG. The credit risk for EPIC bondholders equates to the interest payments on the bond since principal repayment is in the form of Energis shares. Old NGG retains access to some income from the US activities through inter-company receivables and retains 100% ownership of NGC. As a result, the EPIC bonds retain their A2 rating.
Outlook changed to negative to reflect reduced financial flexibility
The current ratings for both NGG and its UK subsidiary were predicated on an expected recovery of the group’s debt protection measures over time following a successful integration of NIMO, including additional disposal proceeds from NGG’s remaining stake in Energis, Moody’s said.
While this is still expected to be the case, the group’s financial flexibility at the current rating level has fallen in recent months. Moody’s has been monitoring the substantial reduction in value of Energis and believes that the impairment in market value is now long-term. Whilst NGG’s remaining stake in Energis is only around 32%, Moody’s believes that there is a possibility that NGG may provide some financial assistance to the company.
There also remains some uncertainty surrounding the contribution NGG may be required to make over time as a result of the group being chosen managing member of one of the Regional Transmission Operators (RTOs) in the US. Last year, NGG was appointed to manage the Alliance RTO, which would have involved an investment of US$500 million. Whilst the company previously did not expect that participation in an RTO would involve a capital outlay, the $500 million investment was consistent with the current rating level.
However, the Alliance RTO has failed to receive approval from the US Federal Energy Regulatory Commission (FERC), with FERC requesting instead that it join forces with a neighbouring RTO to form a larger organisation.
As a result, Moody’s is concerned that NGG may be required to contribute a higher investment to such an enlarged RTO. The change in outlook on NGC reflects Moody’s concern with regard to mounting negative pressure on the UK subsidiary in the case of a greater funding requirement within the group as a whole.
However, some of these concerns are partially offset by the fact that the NIMO acquisition will be funded with a greater amount of shares than previously assumed and that NGG continues to be bound by a 30% consolidated equity/capitalisation covenant required by the SEC, as well as by the continued high visibility of cash flows due to the group’s largely regulated business activities.
National Grid Group is the holding company for a range of international businesses focusing on the ownership and operation of electricity and telecommunications networks. Its two principal geographic areas of activity are the UK and the US.
The National Grid Company plc is a wholly owned subsidiary of NGG, and owns and operates the regulated high-voltage electricity transmission network in England and Wales as well as various interconnectors.
In the US, NGG provides electricity transmission and distribution services in three New England states through National Grid USA. Headquartered in London, England, NGG has a market capitalisation of GBP7.5 billion as per January 2002.